Bad Brew at Green Mountain

The company behind the Keurig coffee brewer system and the K-Cup ecosystem that feeds the appliance posted terrible quarterly results last night.

You wouldn't necessarily know it from the actual numbers. Net sales climbed 37% to $885.1 million, fueled by a 59% spike in K-Cup portion pack sales and a 21% uptick in brewers. Adjusted earnings climbed 33% higher to $0.64 a share.

Unfortunately, Green Mountain was comfortable telling investors to expect net sales to grow as much as 50% higher for the quarter just three months ago. The company is also hosing down its targets for all of 2012.

A major culprit here is the decelerating growth of K-Cup sales. The 21% year-over-year growth in brewers and accessories isn't pretty, but the mere 59% advance in K-Cup sales is a bit of a shock. Starbucks (NAS: SBUX) and Dunkin' Brands (NAS: DNKN) weren't even around in K-Cups a year ago, and the company surveys indicate that the installed base of Keurig owners is 10.8 million to 12.2 million. When you back out the 12% increase in average selling prices on the portion packs, the company sold just 47% more K-Cup units than it did during last year's fiscal second quarter.

That may seem impressive, but Green Mountain and its shareholders were expecting a lot more. The result is that Green Mountain's inventory levels have more than doubled over the past year, and it has had to dump some of its unrequited java.

Margins may have been able to hold up this time, but the company's guidance for all of fiscal 2012 is another disappointment.

Green Mountain now expects to post adjusted earnings of $2.40 a share to $2.50 a share in the fiscal year that ends in September. Just two months ago it was looking at a profit of as much as $2.65 a share. Net sales are now expected to clock in at $3.8 billion to $4 billion. The 45% to 50% top-line growth is short of the 60% to 65% spurt it was forecasting back in February.

There are a few silver linings here. Green Mountain now expects to have an espresso-centric machine on the market -- taking Starbucks' Verismo head-on -- in time for the holidays. There was also a new deal announced that will find Eight O'Clock coffee, Tetley tea, and Good Earth tea available in K-Cups.

However, the negatives obviously far outweigh the positives in the report. There's no sugarcoating here. David Einhorn was right.

Brew ha haShares of Green Mountain have still handily beat the market since I originally recommended the java heavy to Rule Breakers subscribers three years ago. It's been a big winner for the growth stock newsletter service, but if you want to discover the newsletter service's next rule-breaking multibagger, a free report tells all. Check it out before it's gone.